10 February 2011

Future Markets

Let us say that the forex market market is the equity market. That is its structure is the same. This may indeed be the case, but not exactly as one might imagine. But its functionality is different. What one wants in forex, is a way to invest, that is to grow equity in a stable way. One want the functionality of the equity market.

The first point about this is that the equity market right now does not do this, it does not function. Its functionality is to push shares up and down depending on the pressure of money flow, that is why major technical levels (like 11,000) are effective barriers, and more than this, effective ways to reverse momentum.

To get above barriers is not about equity growth so much as money flow. This is not unusual, but the question hardanalytics.com has asked is whether the latest QE has helped growth processes. That is whether it will stay above and head for the next barrier.

The equity market is perhaps though not like the forex market. The forex market is always about valuation, an equity market like this is not. When functioning it is about both future valuations and present valuations. However present valuations are a sign of the collapse of growth processes.

In forex growth processes seem to stabilize its search for optimizing valuations. It is about grounding this process in something the trader can use to make essentially future predictions, but usually very short term ones. But the market is only like this in a flash way and this tend to come back on the trader as the market continues on its way to optimization, leaving the trader with an expired growth process.

But one could conjecture that the forex and equity market are functionally more different than in the times before the crisis. It could be said that these markets were forced to be like one another in the run up to the crisis and this was a causal factor in the crisis.

The way to force this was through the use of an artificial reservoir of money flow from asset inflation and interest rate differentials which maintained the flow of this reservoir. However the crisis destroyed the structure of the reservoir and hence the simulated structure symmetry between forex and equities.

So to simulate structure symmetry now one needs to simulate the equity market as a structure for growing equity over time as well. What does that mean for forex, it means that one assumes that there is a directionality to valuation. But you cannot do this in forex. One cannot ride out retracements in a practical way. However directionality is not about a trend, it is about a path through an optimization process.

This is not about imposing an incorrect model on forex, forex takes apart models, even if one could assume they are correct for a time. It is about taking bites of its functionality in a selective way to create a functional trading model.

But the equity market is about future valuations and therefore about a future structure and a future functionality. One might conjecture that the equity market may be made more permanently like forex by the events of the crisis. Thus one could say that there is a convergence in the future expectation of equity and forex functionality. But what does that mean.

Well, it may mean that the equity market may be more reliant on forex for stability, for its computational core. This one might expect would mean that currency pair valuations have less of an asymmetry. The asymmetry of course comes from dollar and its grounding in the US equity market. That is, one side of this is structured differently from the other.

This would probably mean a less stable forex market. But complex systems have a way of emerging structure that is unexpected, they are like solutions at the far end of a search tree, the unexpected systemically creative solution. What might this be. It is the concept of an optimization on structure from the markets forex core. It may make for more precise equity valuations.

Does this imply pair asymmetry is  a problem for equity valuations, well it means the forex and equity markets are in effect structurally different, thus the assumption at the beginning is correct in the way the markets value on a future expectation of structure. That is the core functionality of financial markets.

Equities should be a long term predictions which collapses to short term in certain circumstances, namely money outflows from the crisis or more usually when earnings disappoint. Forex should be short term predictions based on flash growth processes.

The implication is that forex will play a greater role in future markets, less of a core and more of a whole.  The forex market can cope with instability, it does it all the time and functioned in the crisis, the equity market cannot, thus a future market may be less prone to huge corrections and less dependent on money flow. But it may make the forex market less tradable, unless an increased stability on equities enables a clearer directionality on forex.

If the equity market soars into a new growth process, based on the promise of Internet technology stocks, for example, those creative moats which make so much income and explosive long running share growth, then could one assume that it is business as usual. The idea is that the crisis will have a permanent effect on the markets as computational systems, but its effect may not be a negative one, if one sees the functionality of financial systems as other than to trade in. It may make for more smoothly functioning financial systems.

The point really is, it seems to me that the crisis altered forex and equities and they have not returned to normal functionality yet. The system may adapt to this in a permanent way, no matter what happens. It may be that the delay to raise interest rates has enhanced this process. But it may be a positive development in the evolution of financial markets in the long run.

© 2011 Guy Barry - All Rights Reserved.